What to Make of Heightened Volatility

All year, volatility—swings in both directions, even intraday—has been elevated, contributing to many feeling like markets are on a roller coaster in 2022. The swings may be uncomfortable. But how people react can often be more problematic than that: Wild gyrations are potentially unhelpful, leading many to think momentous events—and perhaps turning points—are afoot. They see the swings as a call to action as a result. We suggest tuning out the noise.

If it seems like 2022 is more volatile than in recent years, it is. Consider intraday data. As Exhibit 1 shows, this year has seen the biggest S&P 500 intraday moves since 2009, with a 1.9% average difference between days’ lows and highs. Volatility normally is elevated, unfortunately, in a bear market. Also see the mid-1970s, early-1980s and early-2000s. And, of course, there is the Great Depression, history’s most volatile period.

Exhibit 1: S&P 500 Bouncier in 2022 Than Most Years, but not Abnormally So

Source: Global Financial Data, Inc., as of 10/19/2022. S&P 500 price index annual average percent change between daily intraday lows and intraday highs, 1/2/1930 – 10/18/2022. 2022’s average is year to date. Note: Intraday prices aren’t available during WWII and the Korean War.

Another way to see 2022’s volatility: 48.8% of trading days this year had moves exceeding 1% up and down, double the 23.4% average since 1928, when daily data begin.^[i] This year has also seen 18.8% of days move bigger than 2% versus a 6.6% average through history. Undoubtedly, 2022 has been a rocky year. Unsurprisingly in a bear market, downside volatility has featured more prominently, too, with 25.6% of year-to-date trading days down -1% or more and 9.7% of them down more than -2%, against historical averages of 11.3% and 3.4%, respectively. In times like this, we find the psychology of “myopic loss aversion”—investors’ predisposition to feel losses much more heavily than equivalent gains—can kick in and cloud judgment.

This is where the trouble comes in. Many investors interpret volatility as a call to action. But volatility alone tells you next to nothing about where markets are heading from here, and that is crucial. Trying to dodge big downswings and pinpoint this bear market’s low is likely to prove impossible. Sentiment-driven daily moves based on people’s feelings at any given moment are inherently unpredictable.

Elevated volatility will likely persist in a new bull market, too—just more of it positive versus negative. Maybe that is underway now. Or maybe it is still to come. But when exactly is unknowable and will only be evident in hindsight. There won’t be an all clear—much less headlines proclaiming that a new bull market is underway. At some perfectly unpredictable moment, a recovery will begin and it will likely be swift—and unloved. Waiting for a bull market can be hard, but that is why it calls for patience and weathering the swings, not trying to time them.

At this juncture, 10 months into a bear market, we think one of the worst possible moves is to sit out the bull market that always follows. If it helps, think to the recovery ahead—and the long-term returns that more than outweigh the down days—as the reward you earn for enduring the volatile stretches.